anderson v. abbott, 321 u.s. 349 (1944)

8/17/2019 Anderson v. Abbott, 321 U.S. 349 (1944)

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321 U.S. 349

64 S.Ct. 531

88 L.Ed. 793

ANDERSON

v.

ABBOTT et al.

No. 3.

Reargued Jan. 12, 13, 1944.

Decided March 6, 1944.

Rehearing Denied Apr. 3, 1944.

See 321 U.S. 804, 64 S.Ct. 845.

[Syllabus from pages 349-351 intentionally omitted]

Mr. Robert S. Marx, of Cincinnati, Ohio for petitioner.

Mr. Allen P. Dodd, of Louisville, Ky., for respondents.

Mr. Justice DOUGLAS delivered the opinion of the Court.

1 The primary question in this case is whether on these facts shareholders of a

bank-stock holding company are liable under § 23 of the Federal Reserve Act,

12 U.S.C. § 64, 12 U.S.C.A. s 64, and § 12 of the National Bank Act, 12 U.S.C.

§ 63, 12 U.S.C.A. § 63, for an assessment on shares of a national bank in the portfolio of the holding company.

2 The essential facts1 may be briefly stated.

3 Banco Kentucky Company was organized under the laws of Delaware in July,

1929. It had broad charter powers in the field of finance. It was organized by

the management of the National Bank of Kentucky and of the Louisville Trust

Company—banking houses doing business at Louisville. Banco perfected thedesired alliance between them by acquiring most of their shares2 in exchange

for its shares. The Bank, the Trust Company, and Banco each had the same

directors and certain common officers. Some of the shareholders who made the


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exchange also purchased additional shares of Banco stock at $25 per share.

Banco stock was also sold at that price on the market to those who did not own

any shares in the Bank or the Trust Company. All told some $9,900,000 in cash

was realized by Banco from the sale of its shares—about $6,000,000 of which

was financed on loans from the Bank and from the Trust Company. Banco's

stock certificates stated that the shares were 'full-paid and nonassessable'. Its

certificate of incorporation provided that the stockholders' property should 'not be subject to the payment of corporate debts to any extent whatever'.

4 The closing date for the exchange of shares was September 19, 1929.

Beginning about September 25, 1929, Banco acquired a majority stock interest

in each of five banks in Kentucky and two banks in Ohio, and a minority stock

interest in another bank in Kentucky. Of these eight banks, two were national.

The shares of the state, as well as the national, banks in the group carried a

double liability.3 The price paid for the shares in these banks was about$11,500,000—of which some $6,500,000 was paid in cash and $5,000,000 in

Banco's shares. Not all of Banco's funds were invested in bank shares. It

acquired for $2,000,000 a $2,000,000 note of its president.4 It purchased 625

shares of a life insurance company for $25,000 cash. It purchased and retired

106,000 of its own shares at a cost of over $2,300,000 some $275,000 less than

Banco received for them. It received dividends of about $1,180,000 on the bank

stocks owned by it and paid them out at once as dividends on its own shares. It

borrowed $2,600,000 from a New York bank and paid back $1,000,000. With$600,000 of that loan it purchased from the Bank certain dubious assets5 —a

transaction which the Kentucky court later set aside. Banco Kentucky Co.'s

Receiver v. National Bank of Ky., 281 Ky. 784, 137 S.W.2d 357. It was

negotiating for the purchase of the shares of an investment banking house when

that house, the Bank and the Trust Company failed. That was in November,

1930—a little more than a year after Banco began its financial career. In

November, 1930 a receiver was appointed for the Bank and one for Banco. In

February, 1931 the Comptroller of the Currency made an assessment on theshareholders of the Bank in the amount of $4,000,000 payable on or before

April 1, 1931. And in March, 1931 the receiver of the Bank notified the

stockholders of Banco that he had demanded payment of the assessment from

the receiver of Banco and that he intended to proceed against them for

collection of the assessment to the extent that he was unable to collect from

Banco. In October, 1931 the receiver of the Bank brought an action against

Banco as holder of substantially all of the Bank's shares. He obtained a

judgment (Keyes v. American Life Ins. Co., D.C., 1 F.Supp. 512) which wasaffirmed on appeal. Laurent v. Anderson, 6 Cir., 70 F.2d 819. Some $90,000

was paid on that judgment. The receiver of the Bank thereupon brought this suit

against those stockholders of Banco who resided in the Western District of


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I.

II.

Kentucky in which he seeks to recover from each his proportionate part of the

balance of the assessment. Similar suits against other stockholders were

brought in federal district courts in other states. The District Court, after a trial,

dismissed the bill. 32 F.Supp. 328. The Circuit Court of Appeals affirmed that

judgment. 6 Cir., 127 F.2d 696. The case is here on certiorari.

5 We are met at the outset with the contention that the decision in Laurent v.

Anderson, supra, holding Banco liable on the assessment is res judicata of the

present claim; and that petitioner by bringing that suit made an election which

bars the present action. We do not agree. Either the record owner or the actual

owner of shares of a national bank may be liable on the statutory assessment.6

Richmond v. Irons, 121 U.S. 27, 58, 7 S.Ct. 788, 802, 30 L.Ed. 864; Keyser v.

Hetz, 133 U.S. 138, 149, 10 S.Ct. 290, 294, 33 L.Ed. 531; Pauly v. State Loan& Trust Co., 165 U.S. 606, 17 S.Ct. 465, 41 L.Ed. 844; Lantry v. Wallace, 182

U.S. 536, 21 S.Ct. 878, 45 L.Ed. 1218; Ohio Valley Nat. Bk. v. Hulitt, 204 U.S.

162, 27 S.Ct. 179, 51 L.Ed. 423; Early v. Richardson, 280 U.S. 496, 50 S.Ct.

176, 74 L.Ed. 575, 69 A.L.R. 658; Forrest v. Jack, 294 U.S. 158, 55 S.Ct. 370,

79 L.Ed. 829, 96 A.L.R. 1457. A receiver may sue both—partial satisfaction of

the judgment against one being a pro tanto discharge of the other. Ericson v.

Slomer, 7 Cir., 94 F.2d 437. And see Continental Nat. Bank & Trust Co. v.

O'Neil, 7 Cir., 82 F.2d 650. The basis of liability of each is different—apparentor titular ownership in one case, actual or beneficial ownership in the other.

Hence the issues involved in each suit are not the same.7 See Reconstruction

Finance Corp. v. Pelts, 7 Cir., 123 F.2d 503; Reconstruction Finance Corp. v.

Barrett, 7 Cir., 131 F.2d 745, 748. If the receiver were barred from proceeding

against one because he had already proceeded against the other, creditors of

banks would be deprived of the full benefits of these statutes. The wisdom of

the receiver's first suit rather than the fixed statutory liability would be the

measure of their protection. There is no justification for such an impairment of the statutory scheme. The rules of election applicable to suits on contracts made

by agents of undisclosed principals (Pittsburgh Terminal Coal Corp. v. Bennett,

3 Cir., 73 F.2d 387, 389) have been pressed upon us. But they have no

application to suits to enforce a liability which has this statutory origin. Cf.

Christopher v. Norvell, 201 U.S. 216, 225, 26 S.Ct. 502, 504, 50 L.Ed. 732, 5

Ann.Cas. 740.

6 The District Court found, and the Circuit Court of Appeals agreed, that Banco

was organized in good faith and was not a sham; that it was not organized for a


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fraudulent purpose or to conceal enterprises conducted for the benefit of the

Bank; that it was not a mere holding company; that it was not formed as a

means for avoiding double liability on the stock of the Bank; and that the

soundness of the Bank and its ability to meet the obligations could not be

questioned until after the formation of Banco. Some of these findings have been

challenged. But we do not stop to examine the evidence. We accept those

findings, as they were concurred in by two courts and no clear error is shown.Brewer Oil Co. v. United States, 260 U.S. 77, 86, 43 S.Ct. 60, 63, 67 L.Ed. 140;

Alabama Power Co. v. Ickes, 302 U.S. 464, 477, 58 S.Ct. 300, 302, 82 L.Ed.

374. We conclude, however, that the courts below erred in dismissing the bill.

7 It is clear by reason of Early v. Richardson, supra, that if a stockholder of the

Bank had transferred his shares to his minor children, he would not have been

relieved from liability for this assessment. And see Seabury v. Green, 294 U.S.

165, 55 S.Ct. 373, 79 L.Ed. 834, 96 A.L.R. 1463. That follows because of the policy underlying these statutes. One who is legally irresponsible cannot be

allowed to serve as an insulator from liability, whether that was the purpose or

merely the effect of the arrangement. A father who transfers his shares to his

minor children has not found a substitute for his liability. See Weston's Case, 5

Ch.App. 614. It does not matter that the transfer was in good faith, without

purpose of evasion and at a time when the bank was solvent. Early v.

Richardson, supra. The vice of the arrangement is found in the nature of the

transferee and his relationship to the transferor. Cf. Nickalls v. Merry, 7 Eng. &Irish App. 530. The same result will at times obtain where the transferee is

financially irresponsible. This does not mean that every stockholder of a

national bank who sells his shares remains liable because his transferee turns

out to be irresponsible or impecunious. It is clear that he does not. Earle v.

Carson, 188 U.S. 42, 54, 55, 23 S.Ct. 254, 259, 47 L.Ed. 373. But where after

the sale he retains through his transferee an investment position in the bank,

including control, he cannot escape the statutory liability if his transferee does

not have resources commensurate with the risks of those holdings. In such acase he remains liable as a 'stockholder' or 'shareholder' within the meaning of

these statutes to the extent of his interest in the underlying shares of the bank.

For he retains control and the other benefits of ownership without substituting

in his stead any one who is responsible for the risks of the banking business.

The law has been edging towards that result. See Hansen v. Agnew, 195 Wash.

354, 80 P.2d 845; Metropolitan Holding Co. v. Snyder, 8 Cir., 79 F.2d 263, 103

A.L.R. 912; Barbour v. Thomas, 6 Cir., 86 F.2d 510; Nettles v. Rhett, 4 Cir., 94

F.2d 42. We think the result is necessary, lest the protection afforded by thesedouble liability provisions be lost through transfers to impecunious or not fully

responsible holding or operating companies whose stock is owned by the

transferor. Whether the transfer is made in avoidance of the double liability as


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in Corker v. Soper, 5 Cir., 53 F.2d 190, or for business reasons which may be

considered wholly legitimate, the result is the same. Depositors are deprived of

the benefit of double liability in either event.

8 Thus it is no bar to the present suit that Banco was organized in good faith, that

there was no fraudulent intent, that Banco was not a sham, that it was not a

mere holding company, or that the shareholders of the Bank had no purpose of avoiding double liability. We are not concerned with any question of good

intention. The question is whether the parties did what they intended to do and

whether what they did contravened the policy of the law. By that test it is clear

to us that the old stockholders of the Bank are liable. For they retained through

Banco their former investment positions in the Bank, including control, and did

not constitute Banco as an adequate financial substitute in their stead. Banco's

asset position immediately after its sales of stock cannot be taken as the

measure of its financial responsibility. Its liquid condition was fleeting; theraising of the cash was but an interim step in the planned evolution of Banco as

a bank-stock holding company. It is the condition of Banco at the end of the

promotion which is significant. Banco emerged as a bank-stock holding

company. Technically it was not merely such a holding company as it had other

interests and investments. But its main assets were stocks in banks, stocks

which carried double liability. Its other assets apart from the $25,000 of life

insurance stock—were always highly suspect and dubious. In substance Banco

as a going concern had no free assets which could possibly be said to constitutean adequate reserve against double liability on the bank stocks which it held. It

was in no true sense comparable to an investment trust or holding company

which holds bank stock in a diversified portfolio. If the small amount of life

insurance stock be left out of account, the situation is in point of fact not

materially different from the case where the only assets held were bank stocks

carrying double liability. Such an arrangement, if successful, would allow

stockholders of banks to retain all of the benefits of ownership without the

double liability which Congress had prescribed. The only substitute whichdepositors of one bank would have for that double liability would be the stock

in another bank carrying a like liability. The sensitiveness of one bank in the

group to the disaster of another would likely mean that at the only time when

double liability was needed the financial responsibility of the holding company

as stockholder would be lacking. However that may be, the device used here

can be so readily utilized in circumvention of the statutory policy of double

liability that the stockholders of the holding company rather than the depositors

of the subsidiary banks must take the risk of the financial success of theundertaking.8

9 That is a basis of liability sufficiently broad to include also the stockholders of


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Banco who had not been stockholders of the Bank. As we have noted, many of

them acquired their shares either for cash or for shares in other banks. It must

be assumed that in making those purchases or effecting those exchanges they

knew what kind of an enterprise Banco was. See Nettles v. Rhett, supra, 94

F.2d pages 48, 49; Anderson v. Atkinson, D.C., 22 F.Supp. 853, 863. Circulars

of the Chicago Stock Exchange, on which Banco's shares were listed, gave a

plain indication of the nature of the enterprise.9 So did circulars of dealers.10And there would not seem to be any doubt that the old stockholders of the Bank

were given at the time of the exchange a fair picture of the nature of the

enterprise which Banco was about to launch. Some shareholders of Banco

claim the right to rescind their purchases of its shares on the ground of

misrepresentations in the sale. But whether or not such relief might be granted

in some instances, it seems clear that Banco's stockholders are bound by the

decisions of the directors which determined, within the scope of the corporate

charter, the kind and quality of the corporate undertaking. As was stated inChristopher v. Brusselback, 302 U.S. 500, 503, 58 S.Ct. 350, 352, 82 L.Ed.

388, 'A stockholder is so far an integral part of the corporation of which he is a

member, that he may be bound and his rights foreclosed by authorized

corporate action taken without his knowledge or participation. Sanger v. Upton,

91 U.S. 56, 58, 23 L.Ed. 220.' And see Pink v. A.A.A. Highway Express, 314

U.S. 201, 207, 62 S.Ct. 241, 245, 86 L.Ed. 152, 137 A.L.R. 957 and cases cited.

The legality of the investments of Banco's funds for the most part is not

challenged. It must be assumed that they were not ultra vires. They fall indeedinto the category of acts of directors which normally cannot be challenged by

stockholders. Cook, Corporations, 8th Ed., § 684. These principles, basic in

general corporation law, are relevant here as indicating that the stockholders of

Banco cannot escape responsibility for the inadequacy of Banco's resources

merely because the choice of its investments was made by the officers and

directors—acts in which the stockholders did not participate and of which

perhaps they had no actual knowledge. The fact that they may have claims

against an officer or director for mismanagement does not relieve them from

liability to the depositors of the subsidiary banks. Cf. Scott v. DeWeese, 181

U.S. 202, 213, 21 S.Ct. 585, 589, 45 L.Ed. 822; Lantry v. Wallace, 182 U.S.

536, 548—554, 21 S.Ct. 878, 882—885, 45 L.Ed. 1218.

10 Normally the corporation is an insulator from liability on claims of creditors.

The fact that incorporation was desired in order to obtain limited liability does

not defeat that purpose. Elenkrieg v. Siebrecht, 238 N.Y. 254, 144 N.E. 519, 34

A.L.R. 592. See 7 Harv.Bus.Rev. 496. Limited liability is the rule not theexception; and on that assumption large undertakings are rested, vast

enterprises are launched, and huge sums of capital attracted. But there are

occasions when the limited liability sought to be obtained through the


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corporation will be qualified or denied. Mr. Chief Judge Cardozo stated that a

surrender of that principle of limited liability would be made 'when the sacrifice

is so essential to the end that some accepted public policy may be defended or

upheld.' Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, 95, 155 N.E. 58, 61, 50

A.L.R. 599; United States v. Milwaukee Refrigerator Transit Co., C.C., 142 F.

247. See Powell, Parent & Subsidiary Corporations (1931) pp. 77—81. The

cases of fraud make up part of that exception. Linn & Lane Timber Co. v.United States, 236 U.S. 574, 35 S.Ct. 440, 59 L.Ed. 725; Rice v. Sanger, 27

Ariz. 15, 229 P. 397; Donovan v. Purtell, 216 Ill. 629, 640, 75 N.E. 334, 1

L.R.A.,N.S., 176; George v. Rollins, 176 Mich. 144, 142 N.W. 337; Higgins v.

California, P. & A. Co., 147 Cal. 363, 81 P. 1070. But they do not exhaust it.

An obvious inadequacy of capital, measured by the nature and magnitude of

the corporate undertaking, has frequently been an important factor in cases

denying stockholders their defense of limited liability. Luckenbach S.S. Co. v.

W. R. Grace & Co., 4 Cir., 267 F. 676, 681; Oriental Inv. Co. v. Barclay, 25Tex.Civ.App. 543, 559, 64 S.W. 80, 88. And see Weisser v. Mursam Shoe

Corp., 2 Cir., 127 F.2d 344. Cf. Pepper v. Litton, 308 U.S. 295, 310, 60 S.Ct.

238, 246, 84 L.Ed. 281; Albert Richards Co. v. Mayfair, Inc., 287 Mass. 280,

288, 191 N.E. 430; Erickson v. Minnesota & Ontario Power Co., 134 Minn.

209, 158 N.W. 979. That rule has been invoked even in absence of a legislative

policy which undercapitalization would defeat. It becomes more important in a

situation such as the present one where the statutory policy of double liability

will be defeated if impecunious bank-stock holding companies are allowed to be interposed as non-conductors of liability. It has often been held that the

interposition of a corporation will not be allowed to defeat a legislative policy,

whether that was the aim or only the result of the arrangement. United States v.

Lehigh Valley R. Co., 220 U.S. 257, 31 S.Ct. 387, 55 L.Ed. 458; Chicago, M.

& St. p. Ry. Co. v. Minneapolis Civic & Commerce Assoc., 247 U.S. 490, 38

S.Ct. 553, 62 L.Ed. 1229; United States v. Reading Co., 253 U.S. 26, 40 S.Ct.

425, 64 L.Ed. 760. The Court stated in Chicago, M. & St. P. Ry. Co. v.

Minneapolis Civic & Commerce Ass'n, supra, 247 U.S. page 501, 38 S.Ct. page

557, 62 L.Ed. 1229, that 'the courts will not permit themselves to be blinded or

deceived by mere forms of law' but will deal 'with the substance of the

transaction involved as if the corporate agency did not exist and as the justice of

the case may require.' We are dealing here with a principle of liability which is

concerned with realities not forms. As we have said, the net practical effect of

the organization and management of Banco was the same as though the shares

of the Bank were held in trust for beneficiaries who were in point of substance

its only owners. Those who acquired shares of Banco did not enter upon an

enterprise distinct from the banking business. Their investment in Banco was in

substance little more than an investment in the shares of the Bank. They were

as much in the banking business as any stockholder of the Bank had ever been.

And they continued in that business through Banco which as a going concern


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lacked assets adequate as a reserve against the contingent statutory liability. Its

stockholders were in point of substance the only source of funds available to

satisfy the assessments. For these reasons the old group of stockholders must be

held to have retained and the new group of stockholders must be held to have

acquired liability as stockholders of the Bank.

11 To allow this holding company device to succeed would be to put the policy of double liability at the mercy of corporation finance. The fact that Congress did

not outlaw holding companies from the national bank field nor undertake to

regulate them during the period of Banco's existence can hardly imply that

Congress sanctioned their use to defeat the policy of double liability. It is true

that Congress later addressed itself to this problem and in the Banking Act of

1933, 48 Stat. 186, 12 U.S.C. § 61, 12 U.S.C.A. § 61, established certain

controls over them. In general, the Board of Governors of the Federal Reserve

System was authorized to issue a voting permit entitling a holding company tovote the stock controlled by it on certain conditions. Apart from requirements

for examination and non-affiliation with securities companies, s 19(a) and (e),

certain standards for financial responsibility were established and holding

companies seeking such permits were granted a specified period of time within

which to meet those standards. Where the stockholders of the holding company

were liable for the statutory liability, a specified reserve of readily marketable

assets was required. § 19(c). Otherwise, the holding company was required to

maintain free of any lien 'readily marketable assets other than bank stock' in anamount equal to a larger percentage of the par value of the bank stocks owned.

§ 19(b). It is apparent that Congress in that Act protected its policy of double

liability by prescribing one standard of financial responsibility for holding

companies whose shares were assessable by their terms and another for those

whose shares were non-assessable.11 We need not stop to consider what would

be the measure of liability in cases arising under that Act where there had been

no compliance with it. But if that Act had been applicable to Banco and Banco

had complied with it, Banco would then have met the standards of financialresponsibility which Congress had prescribed as adequate for the depositors.

Yet the fact that Congress later wrote specific standards into the law means no

more than a recognition on its part of an evil and a fashioning by it of a specific

remedy. It can hardly mean that Congress by its earlier silence had sanctioned

the use of the holding company to defeat the protection which it had provided

for depositors of national banks. The legislative policy which Congress had

long announced was the policy of double liability. It is that policy with which

we are here concerned. It is that policy, declared by Congress, which the judicial power may appropriately protect in the way we have indicated, in

absence of a choice by Congress of another method.


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12 It is of course true that Delaware created this corporation. But the question of

liability for these assessments is a federal question. The policy underlying a

federal statute may not be defeated by such an assertion of state power.

Northern Securities Co. v. United States, 193 U.S. 197, 349, 24 S.Ct. 436, 461,

48 L.Ed. 679; Seabury v. Green, supra. The spectre of unlimited liability for

stockholders has been raised. But there is no cause for alarm. Barring

conflicting federal incorporation statutes, Delaware may choose such rules of

limitation on the liability of stockholders of her corporations as she desires.

And those laws are enforceable in federal courts under the rule of Erie R. Co. v.

Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188, 114 A.L.R. 1487. But no

State may endow its corporate creatures with the power to place themselves

above the Congress of the United States and defeat the federal policy

concerning national banks which Congress has announced. We are concerned

here with that problem and with that problem alone.

13 The result which we reach may be harsh to some of the stockholders of Banco.

But rules of liability are usually harsh especially where they are not bottomed

on fault. Thus private investors have frequently found contrary to their

expectation or understanding that they purchased with their investment an

unlimited liability for the debts of the enterprise. Thompson v. Schmitt, 115

Tex. 53, 274 S.W. 554; Frost v. Thompson, 219 Mass. 360, 106 N.E. 1009;

Weber Engine Co. v. Alter, 120 Kan. 557, 245 P. 143, 46 A.L.R. 158; Rand v.

Morse, 8 Cir., 289 F. 339. It has never been supposed, however, that theinnocence and good faith of investors were barriers to such suits. Horgan v.

Morgan, 233 Mass. 381, 385, 124 N.E. 32. Nor can we accede to the suggestion

that those defenses should be available here. The policy underlying double

liability is an exacting one. Its defeat cannot be encouraged through the

utilization of financial devices which put a premium on ignorance.

14 The suggestion that there should be no liability without fault unless a statute

establishes it denies the whole history of the judicial process in shaping the

rules of vicarious liability. The liability of a master for the torts of his servant

certainly started from no such foundation. And the rules which made those who

purchased shares in Massachusetts business trusts responsible for the debts of

the enterprise were evolved, with few exceptions, on a common law, not a

statutory, basis. Magruder, The Position of Shareholders in Business Trusts, 23

Col.L.Rev. 423. In the field in which we are presently concerned, judicial

power hardly oversteps the bounds when it refuses to lend its aid to a

promotional project which would circumvent or undermine a legislative policy.To deny it that function would be to make it impotent in situations where

historically it has made some of its most notable contributions. If the judicial

power is helpless to protect a legislative program from schemes for easy


10/26

avoidance, then indeed it has become a handy implement of high finance.

Judicial interference to cripple or defeat a legislative policy is one thing;

judicial interference with the plans of those whose corporate or other devices

would circumvent that policy is quite another. Once the purpose or effect of the

scheme is clear, once the legislative policy is plain, we would indeed forsake a

great tradition to say we were helpless to fashion the instruments for

appropriate relief.

15 In summary, we see no difference between the various classes of stockholders

of Banco which would support a difference in their liability. Those who

purchased stock of Banco for cash were as much participants in the banking

business as those who acquired their stock in exchange for shares of the Bank.

Together they shared the benefits of ownership of the subsidiary banks,

including control. Certainly a sale of shares of Banco by the old stockholders of

the Bank did not give those shares an immunity bath. To draw distinctions between the classes of stockholders of Banco would be to make the protection

afforded by these statutes turn on accidents of acquisition quite irrelevant to the

concept of 'stockholders' or 'shareholders' on whom Congress placed this

liability. One simple illustration will make that plain. A purchases shares of an

underlying bank for $10,000 in cash and exchanges those shares for shares of

Banco. B hands over to Banco $10,000, Banco purchases the shares of the

underlying bank, and then issues its shares to B. From the practical point of

view A and B are investors of the same class. To say that A is liable and B notliable when both start with cash and end with identical investments is to make

the difference between liability and no liability turn on distinctions which have

no apparent relevancy to the legislative policy which the rule of double liability

was designed to protect. And to say that courts may hold A liable but not B is to

make the occasions for the assertion of judicial power turn on whimsical

circumstances.

16 The final suggestion is that the old stockholders of the Bank remain liable for the full assessment on the shares of the Bank which they exchanged for shares

of Banco. But that overlooks the fact that their interest in those underlying

shares was diluted by the issuance of Banco's shares to others.12 Double

liability is an incidence of ownership. It has long been held that a stockholder

who in good faith parts with all his interest in the shares rids himself of that

double liability, even though his transferee is not responsible. Earle v. Carson,

supra. We could hardly adhere to that principle and still hold the old

stockholders of the Bank liable for the full assessment on the shares which theyexchanged for shares of Banco. The other stockholders of Banco acquired

through their investment in it an interest in the shares of the Bank. To the extent

of that interest the beneficial ownership of the old stockholders of the Bank in


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I.

its shares was as definitely reduced as if they had made a transfer of that part of

their holdings.

17 Certain stockholders of Banco claim that they are entitled to rescind their

purchases of Banco's shares because of misrepresentations made to them when

they acquired the shares. We do not reach those questions. Nor do we stop to

determine whether such a defense would avoid liability on the assessment (cf.Oppenheimer v. Harriman Nat. Bank & Trust Co., 301 U.S. 206, 57 S.Ct. 719,

81 L.Ed. 1042) and, unlike the case where some shareholders are insolvent

(United States v. Knox, 102 U.S. 422, 425, 26 L.Ed. 216), increase the pro rata

liability of the other shareholders of Banco. It is sufficient at this time to state

that the liability of the shareholders of Banco would be measured by the

number of shares of stock of the Bank, whether several or only fractional,

represented by each share of stock of Banco; and that the assessment liability of

each share of stock of Banco would be a like proportion of the assessmentliability of the shares of the Bank represented by the former.

18 The judgment of the Circuit Court of Appeals is reversed and the cause is

remanded to the District Court for proceedings in conformity with this opinion.

19 Reversed.

20 Mr. Justice JACKSON, dissenting.

21 Mr. Justice ROBERTS, Mr. Justice REED, Mr. Justice FRANKFURTER, and

I find ourselves unable to join in the judgment of the Court.

22 The Court accepts concurrent findings of fact by the two lower courts, but

reverses their concurrent judgment. It holds that the findings establish liability

as matter of law on two very different kinds of stockholdings: (1) holdingcompany stock taken in exchange for double liability stock of the National

Bank of Kentucky; and (2) holding company stock bought and fully paid for in

cash. We think holders of the latter are not liable on any principle heretofore

known to the law and that if owners of the former are to be held it must be on a

quite different principle than that stated by the Court.

23 Former National Bank of Kentucky stockholders had stock in the Bank itself

which carried double liability.1 The Bank failed November 30, 1930, and if

they had then held that stock, each would have been liable for assessment upon


12/26

his shares. The aggregate assessment was $4,000,000. Only about a year before

the failure, on September 19, 1929, this double-liability bank stock was

exchanged for shares of the holding company purporting to be fully paid and

nonassessable. At the same time Bank of Kentucky stockholders also bought

additional holding company stock for cash to the amount of $4,471,950. Bank

of Kentucky stockholders as a group thus paid into the holding company cash

morethan sufficient to meet the assessment now levied. In addition to that,investors who were not connected with the Bank bought shares for cash

amounting to $5,397,000. The Court nevertheless holds that the Bank of

Kentucky stockholders contravened the policy of the law and are subject to the

double liability because they 'did not constitute Banco as an adequate financial

substitute in their stead.' We do not see how such a statement of fact, and it

certainly is not a matter of law, can be conformable with acceptance of the

findings of fact of the courts below. Nor are we able to reconcile the view that

'the old group of stockholders must be held to have retained * * * the liability asstockholders of the bank' with the one later expressed that their interest was

'diluted' so as to give them a pro rata reduction of liability. (See note 12 of the

opinion of the Court.) (Emphasis supplied.) It seems to us that the transfer of

their bank stock to the holding company either was valid, in which case it

relieved of all liability; or it was invalid, in which case it relieved of no liability.

The doctrine that a transfer may be good enough to dilute liability but bad

enough to carry along a part of it is new to us and we have difficulty grasping

its implications.

24 We are, however, agreed that it would be a proper use of the power of this

Court for it to examine the evidence that lies back of these findings and

determine whether clear error has been committed and whether the conditions

disclosed are such that a bona fide transfer of the stock took place sufficient to

shake off double-liability obligations.

25 In spite of the exchange of National Bank of Kentucky stock, its stockholdersthrough the holding company kept both a large measure of control of the Bank

and the benefits of investment in it. They, or those acting in their behalf, had

determined the policy of the holding company, had sponsored its

representatives, and had selected its officers and personnel, including the

manager who proved to be false to his trust. There is evidence that the National

Bank of Kentucky had for some time been under criticism by the Comptroller

for many of its loans and some of its policies, although it is found not to have

been insolvent. The exchange did not consist of individual acts but was aconcerted movement, planned by the Bank management, by which the holding

company absorbed all of the stockholdings and all of the double liability.


13/26

II.

26 The Court might properly, if examination of the evidence should warrant it,

reach a legal conclusion that the double liability of the stockholders of the

National Bank of Kentucky survives the exchange and that those who have

continued their interest in the Bank through the holding company are liable

upon assessment in the same manner and to the extent that they would have

been had the holding company transactions never occurred. But this would be

because the formal transfer of the stock out of their own names would not be

recognized as a defense. The Court's conclusion rests on a quite different

theory. It concludes that the transfer was valid to relieve these stockholders of

their liability as stockholders of the Bank, but that they became subject to a new

and smaller liability as stockholders of a holding company. With this we cannot

agree. The holding company, its financing, its management, and all that relates

to it constitute relevant material as to whether under principles that have long

been recognized the transfer is good. We do not think they create a new

liability.

27 After holding that former owners of National Bank of Kentucky shares are

liable because they did not find an adequate substitute for their own personal

liability, the Court proceeds to hold purchasers of holding-company stock for

cash to be under a substituted liability pro tanto. The grounds upon which Bank

of Kentucky stockholders and non-Bank of Kentucky stockholders are bothheld seem to conflict. If the new stockholders for cash are liable it is hard to see

why the old ones have not found a substitute, and if the Bank of Kentucky

stockholders have not found a substitute, it is difficult to see a basis on which

the new stockholders are liable.

28 Stock purchasers for cash have at no time owned a stock that purported to carry

double liability. On the contrary, by the terms of the stock certificates and by

the law of the corporation's being, their shares were fully paid andnonassessable. These stockholders cannot be said in any way to have assumed

any express or implied contractual assessment liability. No statute of the United

States and no applicable state statute then or since has purported to impose a

double liability upon these holding-company shares. No controlling precedent

in this Court at the time these stockholders purchased or since (until today)

purported to attach a double liability to such shares.2

29 The reason given for this decision is that 'the interposition of a corporation will

not be allowed to defeat a legislative policy' and that 'no State may endow its

corporate creatures with the power to place themselves above the Congress of

the United States and defeat the federal policy concerning national banks which


14/26

Congress has announced.' (Italics supplied.)

30 We have been unable to find that Congress ever has announced a legislative

policy such as the Court announces. And the Court nowhere points it out. The

National Banking Act applicable at the time provided that the stockholders 'of

every national banking association' shall be under assessment liability. But

Congress nowhere has said that the stockholders of a corporation that is not anational banking association shall be liable to assessment because the latter

corporation held some or all of the stock of a national bank. Indeed, the history

of banking legislation shows that Congress has considered the problems created

by the holding company and not only has failed to adopt such a policy as the

Court is declaring, but has made other provisions inconsistent with such a

policy.

31 No legislation on the subject appears until 1933, when Congress enacteddetailed regulation of the relations between holding companies and national

banks. It required the holding company to obtain a permit to vote national bank

shares and empowered the Board of Governors of the Federal Reserve System

to grant or withhold the permit.3 No permit can be granted except upon certain

conditions, and assumption by holding-company stockholders of an assessment

liability is not among them. In general, they are (a) that the holding company

must submit to examination in the same manner as the national bank and must

publish periodic statements of condition; (b) that after five years from thestatute's enactment, each holding company must possess readily marketable

assets and free assets other than bank stock in a prescribed amount; and (c) that

after five years a holding company whose stockholders or members are

individually and severally liable may be relieved of establishing a part of this

reserve under certain circumstances. Congress was informed that some bank

stock holding corporations were, by the law of the states in which they were

incorporated, subject to double liability just as were stockholders of banks. It

was also informed that other bank holding corporations by the law of their incorporation were not so liable.4 It did not expressly or by implication

recognize or create a uniform double liability by federal act on stockholders of

state-created holding companies. It made specific provision, on the contrary,

for each class of corporation. Where does this Court get authority to disregard

the distinction Congress has thus created and to impose a single rule of its own

making instead? When Congress has expressly set up a standard of

diversification for holding company assets and has given the companies five

years to meet it, from what do we derive authority to say the five-year adjustment period shall be ignored? How can we say retroactively that there is a

liability for failure to do before Congress acted something which, after it did

act, it expressly gave five years to do? And how can such a result be said to be


15/26

III.

an enforcement of congressional policy, which we understand to be the basis of

the Court's opinion?

32 If to legislate were the province of this Court, we would be at liberty candidly

to exercise discretion toward the undoing of the holding company. Some of usfeel that as utilized in this country it is, with a few exceptions, a menace to

responsible management and to sound finance, shifting control of local

institutions to absentee managements and centralizing in few hands control of

assets and enterprises bigger than they are able well to manage—views which

are matters of record.5

33 But we are of one opinion that no such latitude is confided to judges as here is

exercised. We are dealing with a variety of liability without fault. The Court is professing to impose it, not as a matter of judge-made law, but as a matter of

legislative policy, and it cannot cite so much as a statutory hint of such a policy.

The Court is not enforcing a policy of Congress; it is competing with Congress

in creating new regulations in banking, a field peculiarly within legislative

rather than judicial competence. Nor was such a policy of assessment liability

one whose importance was so transcending as to set aside the policy of

permitting corporate enterprise under limited liability. Congress has since

repealed the double liability, even of holders of stock in national banks;6 andwhen in force, it had little practical value to depositors.7 States also have

abandoned the assessment plan.8 Courts should, of course, see that the

congressional policy is not defeated by any fraud, by creating sham

corporations, or by any other artifice. When, however, assessment liability is a

failure only because the corporate owner of the stock is not solvent, that is not a

circumstance which will warrant disregard of the corporate entity so as to

render stockholders liable. The findings here, accepted by the Court, eliminate

every charge of fraud, bad faith, or intentional evasion of liability.9

34 We are fully agreed that Bank of Kentucky depositors, however, should not be

prejudiced by a transfer to the holding company of its stock in violation of letter

or spirit of the National Banking Act. If the case warrants disregard of the

transfer, the depositors then would have just the protection that they would

have enjoyed had no holding company intervened. The Court, however, makes

the holding company a windfall to bank creditors by extending the liability to

persons never otherwise reachable. We may disallow the holding company as asanctuary for stockholders escaping pre-existing liability without making of it a

trap for unwary and unwarned investors.


16/26

Further details concerning the financial transactions indirectly involved in this

litigation may be found in Atherton v. Anderson, 6 Cir., 86 F.2d 518; Id., 6 Cir.,

99 F.2d 883; Banco Kentucky's Receiver v. Louisville Trust Co's Receiver, 263

Ky. 155, 92 S.W.2d 19.

The shares of the Bank and the Trust Company had been earlier transferred to

trustees who issued Trustees' Participation Certificates. It was these certificates

which Banco received from the shareholders of the two banks in exchange for

its shares. The command which Banco had over the underlying shares is

described in Laurent v. Anderson, 6 Cir., 70 F.2d 819.

See Ky.Rev.Stat.1942, § 287.360; Ohio Code Ann.1940, § 710-75. At or about

the time of Banco's failure the shares in the other banks were sold or disposedof at rather nominal prices. It appears that the closing of the Bank was followed

by heavy runs on these other banks; and the local interests in most of the cities

where the banks were located were willing to support the banks to keep them

35 To disregard the transfer of this stock, and to hold former stockholders liable to

the same extent as if they had made no such transfer, is the manner or

proceeding indicated under proper circumstances by the National Banking Act

itself. Instead of considering whether to disregard the transfer the Court

disregards the corporate entity of the holding company because it says these

obligations arise from legislative policy. Even if we could find such a policy,

legislative liabilities are numerous. It is probably a legislative policy that a

corporation shall pay all of its debts. The reasoning employed by the Court, we

should think, would leave it uncertain whether stockholders may not be liable

for many other types of indebtedness. Congress, if the matter of banking

reform were left to it, could define the limits of vicarious liability at the time it

was imposed. The Court is leaving the limits and extent of that liability so

vague that a whole cluster of decisions will have to be written to clarify what is

being done today. And meanwhile we know of no way that a stockholder can

learn the extent and circumstances of stockholder liability except to give hisname to a leading case.10

36 The Court admits that the judgment is 'harsh.' Why is it so if it is according to

any law that was known or knowable at the time of the transactions? To enforce

a double liability so incurred would be no harsher than to enforce any contract

obligation that had been assumed without expecting it would result in liability.

This decision is made harsh by the element of surprise.11 Its only harshness is

that which comes of the Court's doing with backwards effect what Congress hasnot seen fit to do with forward effect.

1

2

3


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open if Banco would surrender control. Banco, it seems, was also anxious to

avoid double liability on those shares.

The president of Banco was also president of the Bank. This note was acquired

in November, 1929, from Wakefield & Co. It was secured by 60,000 shares of

Banco stock and 22,500 shares of stock of Standard Oil of Kentucky. Nothing

was ever paid on the note. Nothing was realized on the Banco stock. Some$440,000 was realized on the Standard Oil stock. In December 1930 the

president of Banco and maker of the note filed a voluntary petition in

bankruptcy. He was discharged. Wakefield & Co. made an assignment for the

benefit of creditors in 1931 and apparently no dividends have yet been paid its

creditors.

These were a Murray Rubber note in the amount of $580,000 and a note of

Lewis C. Humphrey for $20,000—of which the bank examiner had been quite

critical for some time.

Provisions for the termination of double liability on shares of national banks

are contained in the Act of June 16, 1933, 48 Stat. 189, and the Act of August

23, 1935, 49 Stat. 708, 12 U.S.C. § 64a, 12 U.S.C.A. § 64a.

It is true that the court in Laurent v. Anderson, supra, stated that Banco was 'in

every sense the true and beneficial owner' of the shares of the Bank. 70 F.2d

page 824. But it is apparent from the opinion that the court was answering thecontention that the trustees of the participation certificates were responsible for

the assessment. Banco's defense was based on § 63 of the National Bank Act. It

argued that under that section only funds in the hands of the trustees were

liable. That argument was rejected by the court.

The history of bank-stock holding companies shows that their organizers were

acutely aware of this problem and at times took steps to protect the depositors

of the subsidiary banks on possible assessments on the bank stocks. Oneholding company is said to have kept 'at all times an amount in cash or its

equivalent equal to our aggregate stockholders' liability on the bank stocks

owned by us.' Branch, Chain and Group Banking, Hearings under H. Res. 141,

71st Cong., 2d Sess.(1930) p. 1181. A similar method was for the holding

company 'to carry in its treasury a large reserve of readily marketable securities

which may be liquidated in order to make good any shareholders' liability that

may be imposed upon the holding company.' Bonbright & Means, The Holding

Company (1932), p. 331. Cf. Nineteenth Annual Report, Superintendent of Banks of California (1928), p. 21. Another method of safeguarding the

depositors was to make express provision in the charter of the holding company

that its stockholders were ratably liable for any statutory liability imposed on it

4

5

6

7

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by reason of its ownership of bank stocks. Branch, Chain, and Group Banking,

op. cit., pp. 1042—1043; Barbour v. Thomas, 6 Cir., 86 F.2d 510, 513, 514.

Wisconsin provided for such a liability by statute. Wis.Stat.1941, § 221.56.

'The BancoKentucky Company was organized under the laws of the State of

Delaware on July 16, 1929, with an authorized capital of 2,000,000 shares of

$10 par value. The Company was organized for the purpose of owning acontrolling interest in state and national banks located primarily in Kentucky,

Ohio and Indiana. Its charter gives it broad powers entitling it to engage in a

wide range of investment and other activities.

'The BancoKentucky Company has acquired, through an exchange of stock,

nearly 100% of the shares of the National Bank of Kentucky-Louisville Trust

Company, and in addition its stockholders have subscribed to 480,000 shares of

its stock for cash. This cash will be used for acquiring majority interests in other

banks and for other corporate purposes.'

In listing its shares on the Chicago Stock Exchange it gave the Exchange the

following description of its business:

'(b) Primary purpose: To acquire control and operate Banks and Trust

Companies.

'(c) Nature of Business: This company has not engaged in the business of investing and reinvesting in a diversified list of securities of other corporations

for revenue and profit, but has limited its activities to acquiring control of

Banks and Trust Companies and the operation of same.'

Thus a circular of Blyth & Co. stated:

'The Banco Kentucky Company was recently formed to acquire and hold

controlling interests in commercial banks throughout the Middle West. By

charter, broad powers are conferred upon the Company, so that all types of

operations in the financial field are permitted but no investments are

contemplated other than controlling interests in financial institutions.

'Upon completion of present transactions the Company will control the National

Bank of Kentucky, organized in 1834, the Louisville National Bank and Trust

Co., organized 1884 as Louisville Trust Company, both of Louisville, Ky., the

Pearl Market Bank & Trust Co., organized 1907, and the Brighton Bank &

Trust Co., organized 1898, both of Cincinnati, Ohio, and the Central SavingsBank and Trust Company, organized 1906, of Covington, Ky. In addition, the

Company has funds of approximately $6,000,000, which are expected to be

used for the acquiring of additional banking institutions.'

9

10


19/26

As stated in S. Rep. No. 77, 73d Cong., 1st Sess., p. 11: 'The affiliates of this

type (holding companies) are prohibited from voting the stocks of national

banks unless they are willing to undertake to accept examination by the Federal

Reserve Board, divest themselves of ownership of stock and bond financing

concerns, and comply with regulations designed to insure their ownership of

sufficient free assets to make sure that they can satisfy the double liability of

their shareholders in case any of the banks owned by such a company should gointo the hands of receivers or be closed.'

The old stockholders of the Bank have a lesser interest in the shares of the Bank

than they had prior to the exchange. Their interest in the shares of the Bank

decreased proportionately with the increase in the outstanding stock of Banco.

That resulted in a pro rata reduction in their liability. The other group of

stockholders of Banco acquired that portion of the liability of which the old

stockholders of the Bank were relieved.

The pertinent sections of the Bank Act follow:

'The shareholders of every national banking association shall be held

individually responsible * * * for all contracts, debts, and engagements of such

association, to the extent of the amount of their stock therein, at the par value

thereof, in addition to the amount invested in such shares; * * *.' 12 U.S.C. §

63, 12 U.S.C.A. § 63.

'The stockholders of every national banking association shall be held

individually responsible for all contracts, debts, and engagements of such

association, each to the amount of his stock therein, at the par value thereof in

addition to the amount invested in such stock. The stockholders in any national

banking association who shall have transferred their shares or registered the

transfer thereof within sixty days next before the date of the failure of such

association to meet its obligations, or with knowledge of such impending

failure, shall be liable to the same extent as if they had made no such transfer,to the extent that the subsequent transferee fails to meet such liability; but this

provision shall not be construed to affect in any way any recourse which such

shareholders might otherwise have against those in whose names such shares

are registered at the time of such failure.' 12 U.S.C. § 64, 12 U.S.C.A. § 64.

The authorities cited to support the Court's disregard of the corporate entity fall

far short of persuasion. The quotation of the statement by Mr. Chief Judge

Cardozo from Berkey v. Third Avenue Railway Co., 244 N.Y. 84, 155 N.E. 58,61, 50 A.L.R. 599, 'that a surrender of that principle of limited liability would

be made 'when the sacrifice is so essential to the end that some accepted public

policy may be defended or upheld" has a very different significance in its

11

12

1

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context. The facts, including interchangeable names of parent and subsidiary,

complete financial and operating domination, and use of one company's assets

by the other, indicated a stronger case for disregard of the corporate fiction

than do the findings here. Nevertheless, Chief Judge Cardozo considered that

the corporate entity could not be disregarded in favor of a tort claimant and

said: 'In such circumstances, we thwart the public policy of the state instead of

defending or upholding it, when we ignore the separation between subsidiaryand parent and treat the two as one.'

Other cases cited afford no more support for the decision. United States v.

Milwaukee Refrigerator Transit Co., C.C., 142 F. 247, held that payments by a

carrier to a corporation wholly controlled by a shipper might constitute rebates

under the Elkins Act, 49 U.S.C.A. § 41 et seq. The statements in Powell, Parent

& Subsidiary Corporations, 77-81, are completely general and to be read in the

light of the specific categories which precede the page citation, all of whichinvolve active wrong by a parent corporation. Linn & Lane Timber Co. v.

United States, 236 U.S. 574, 35 S.Ct. 440, 59 L.Ed. 725, involved the question

whether an 'instrumentality' corporation could acquire rights which would

enable it to stand better than its transferor-creator. Rice v. Sanger Bros., 27

Ariz. 15, 229 P. 397, found a corporation to be organized for fraudulent

purposes and the former partners who became its stockholders were held liable.

Donovan v. Purtell, 216 Ill. 629, 75 N.E. 334, 1 L.R.A., N.S., 176, holds

nothing more than that an officer of a corporation who is personally guilty of

fraud will be held liable therefor. George v. Rollins, 176 Mich. 144, 142 N.W.

337, stands for the proposition that equity will enforce a restrictive covenant

against a successor corporation formed for the purpose of evading it. Higgins v.

California Petroleum Co., 147 Cal. 363, 81 P. 1070, held that in the

circumstances certain successor corporations assumed a lease and therefore had

to pay royalties; there was no disregarding of the corporate entity involved.

Luckenbach S.S. Co. v. W. R. Grace & Co., 4 Cir., 267 F. 676, comes nearer

the mark, but still is far wide of it. A steamship corporation leased its fleet of

vessels to a $10,000 corporation, formed and 90 per cent owned by it, for an

utterly inadequate rental. It was held that this turning over of the corporation's

ships to a subsidiary which was 'itself in another form' rendered the parent

corporation liable for the subsidiary's breach of contract. Oriental Investment

Co. v. Barclay, 25 Tex.Civ.App. 543, 64 S.W. 80, allowed a hotel employee to

recover for personal injuries against the parent holding company, even though

technically he was the employee of the subsidiary operating company, of whose

existence he was unaware and which had been capitalized with $2,000 to

operate a property whose monthly rental alone was $1500. Weisser v. MursamShoe Corp., 2 Cir., 127 F.2d 344, 346, arose on dismissal of the complaint and

it was held that on a full trial it might be found that the subsidiary was 'only a

tool of the other defendants, deliberately kept judgment proof, to obtain the


21/26

benefits of a lease with plaintiffs without assuming any obligations. The

plaintiffs allege that this was done fraudulently * * *.' Pepper v. Litton, 308

U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281, and Albert Richards Co. v. Mayfair, Inc.,

287 Mass. 280, 191 N.E. 430, both dealt with cases where parent corporations

claimed priority over other creditors of a subsidiary; in each the subsidiary was

held to be an instrumentality of the parent and, to avoid a fraud on creditors, the

latter's claim of priority was denied. In Erickson v. Minnesota & .ontario Power Co., 134 Minn. 209, 158 N.W. 979, a parent corporation was held liable for

damage caused by a dam owned by a subsidiary; the parent paid the operating

expenses of the dam, took all the earnings of the subsidiary, had a mortgage on

all its assets, and in addition had a direct right of control over the operation of

the dam. United States v. Lehigh Valley Railroad, 220 U.S. 257, 31 S.Ct. 387,

55 L.Ed. 458, and United States v. Reading Co., 253 U.S. 26, 40 S.Ct. 425, 64

L.Ed. 760, held that a railroad's exercise of its power as a stockholder might

amount to such a commingling of affairs as to make it liable for a violation of the commodities clause. Chicago, Milwaukee & St. Paul Ry. Co. v.

Minneapolis Civic Association, 247 U.S. 490, 38 S.Ct. 553, 62 L.Ed. 1229,

held that additional terminal charges made by a wholly owned subsidiary as

compared with terminal charges by the parent might be held to constitute a

discrimination.

§ 19 of the Banking Act of 1933, amending § 5144 of the Revised Statutes,

provides in part as follows:

'* * * shares controlled by any holding company affiliate of a national bank

shall not be voted unless such holding company affiliate shall have first

obtained a voting permit as hereinafter provided, which permit is in force at the

time such shares are voted.

'For the purposes of this section shares shall be deemed to be controlled by a

holding company affiliate if they are owned or controlled directly or indirectly

by such holding company affiliate, or held by any trustee for the benefit of theshareholders or members thereof.

'Any such holding company affiliate may make application to the Federal

Reserve Board for a voting permit entitling it to cast one vote at all elections of

directors and in deciding all questions at meetings of shareholders of such bank

on each share of stock controlled by it or authorizing the trustee or trustees

holding the stock for its benefit or for the benefit of its shareholders so to vote

the same. The Federal Reserve Board may, in its discretion, grant or withholdsuch permit as the public interest may require. In acting upon such application,

the Board shall consider the financial condition of the applicant, the general

character of its management, and the probable effect of the granting of such

3


22/26

permit upon the affairs of such bank, but no such permit shall be granted except

upon the following conditions:

'(a) Every such holding company affiliate shall, in making the application for

such permit, agree (1) to receive, on dates identical with those fixed for the

examination of banks with which it is affiliated, examiners duly authorized to

examine such banks, who shall make such examinations of such holdingcompany affiliate as shall be necessary to disclose fully the relations between

such banks and such holding company affiliate and the effect of such relations

upon the affairs of such banks, such examinations to be at the expense of the

holding company affiliate so examined; (2) that the reports of such examiners

shall contain such information as shall be necessary to disclose fully the

relations between such affiliate and such banks and the effect of such relations

upon the affairs of such banks; (3) that such examiners may examine each bank

owned or controlled by the holding company affiliate, both individually and inconjunction with other banks owned or controlled by such holding company

affiliate; and (4) that publication of individual or consolidated statements of

condition of such banks may be required;

'(b) After five years after the enactment of the Banking Act of 1933, every such

holding company affiliate (1) shall possess, and shall continue to possess

during the life of such permit, free and clear of any lien, pledge, or

hypothecation of any nature, readily marketable assets other than bank stock in

an amount not less than 12 per centum of the aggregate par value of all bank stocks controlled by such holding company affiliate, which amount shall be

increased by not less than 2 per centum per annum of such aggregate par value

until such assets shall amount to 25 per centum of the aggregate par value of

such bank stocks; and (2) shall reinvest in readily marketable assets other than

bank stock all net earnings over and above 6 per centum per annum on the book

value of its own shares outstanding until such assets shall amount to such 25 per

centum of the aggregate par value of all bank stocks controlled by it;

'(c) Notwithstanding the foregoing provisions of this section, after five years

after the enactment of the Banking Act of 1933, (1) any such holding company

affiliate the shareholders or members of which shall be individually and

severally liable in proportion to the number of shares of such holding company

affiliate held by them respectively, in addition to amounts invested therein, for

all statutory liability imposed on such holding company affiliate by reason of

its control of shares of stock of banks, shall be required only to establish and

maintain out of net earnings over and above 6 per centum per annum on the book value of its own shares outstanding a reserve of readily marketable assets

in an amount of not less than 12 per centum of the aggregate par value of bank

stocks controlled by it, and (2) the assets required by this section to be


23/26

possessed by such holding company affiliate may be used by it for replacement

of capital in banks affiliated with it and for losses incurred in such banks, but

any deficiency in such assets resulting from such use shall be made up within

such period as the Federal Reserve Board may by regulation prescribe. * * *'

June 16, 1933, c. 89, 48 Stat. 186, 187.

At the Senate hearings which preceded the Banking Act of 1933, Mr. L. E.Wakefield, vice-president of one of the largest bank holding companies,

testified as follows with respect to double liability:

'Mr. Wakefield. The stockholders of the First Bank Stock Corporation, being a

Delaware corporation, do not have a double liability. When we started to

organize this institution we did all the work on the theory we would have it a

Minnesota corporation, which would have double liability. At the last minute,

when we found that every stockholder in North Dakota, South Dakota, and

Montana would, in case of death, have a double inheritance tax, they

complained so strongly about that situation we shifted and put it into a

Delaware corporation.

'The other factor that we have heard discussed and that I think of in connection

with banking such as we are doing is this thought in the public mind, or some

minds, that, for instance, our being a Delaware corporation was intended to

avoid the double liability of stockholders. I would say that if that is of

importance it might be easily provided that a holding company should create asurplus account in its holdings or build up a surplus account of some proportion

of the capital of the banks that should be kept in liquid securities, or something

of that sort. * * *' Hearings before Senate Committee on Banking and Currency

Pursuant to S. Res. 71, 71st Cong., 3d Sess., Pt. 4, pp. 616, 620.

Earlier, Mr. J. W. Pole, Comptroller of the Currency, had testified:

'Mr. Pole. We call that a group-banking system in the Northwest. In the case of the Northwest and the First Bank Stock Corporation, I think that their stock is

not subject to the double liability, although the stock of some holding

corporations is subject to double liability. But in the case of those two

corporations, in those particular cases—not that it obtains too generally—they

have invested in securities other than bank stocks, so that a judgment against

either one of those corporations would be good for the assessment.

'Mr. Willis. In those particular cases?

'Mr. Pole. In those particular cases; yes, sir.

'Mr. Willis. But there are cases where they are not subject to the assessment?

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'Mr. Pole. There are cases where they are not subject to the assessment; yes, and

where they hold nothing but bank stocks.

'Mr. Willis. In those cases where you have an affiliated bank that buys all the

stock of the bank itself, what becomes of the double liability of the

shareholder?

'Mr. Pole. The securities company where it buys the stock of the bank itself,

would be the holder of the stock and subject to assessment.

'Mr. Willis. Is not the double liability then very largely neutralized?

'Mr. Pole. Yes.

'Mr. Willis. What have you done to correct that?

'Mr. Pole. We have done nothing to correct it.

'Mr. Willis. What can be done by law to correct it?

'Mr. Pole. That is a big problem.

'Mr. Willis. Can you make a recommendation covering that along with your

other problems?

'Mr. Pole. Yes.'

Senate Hearings, supra, Part 1, pp. 27—28.

For a provision extending double liability to holding-company stockholders, see

Wisconsin Stat. 1943, § 221.56(3).

See 56 Reports of American Bar Association (1931) p. 763; Briefs for

Government in Electric Bond & Share Co. v. S.E.C., 303 U.S. 419, 58 S.Ct.

678, 82 L.Ed. 936, 115 A.L.R. 105; testimony in support of a proposal to

withdraw from holding companies tax exemption of intercorporate dividends,

Hearings before Senate Committee on Finance, on H.R. 8974, 74th Cong., 1st

Sess., p. 221, et seq.

The removal of liability is conditioned upon giving the notice prescribed. June

16, 1933, c. 89, § 22, 48 Stat. 189, Aug. 23, 1935, c. 614, § 304, 49 Stat. 708,

12 U.S.C. § 64a, 12 U.S.C.A. § 64a.

Comptroller Pole stated at the Senate hearings: 'We hear a good deal about

double liability. It is not so important as at first one might so regard it. As an

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illustration, the deposits, we will say, of a bank with $100,000 capital would be

ordinarily $1,000,000. If you collected the entire 100 per cent assessment, you

would only collect 10 per cent of your deposits after all. * * * But in practice

you would not collect over 50 per cent of that. We do collect, as a matter of

fact, just about 50 per cent.' Hearings, supra note 4, Pt. 1, p. 28.

Depositors in the bank have already received 77 per cent of their deposits. Few pre-depression investments have yielded so much. About 6,000 stockholders of

Banco have lost 100 per cent of their investment, and are now faced with

liability in undetermined amounts. As to many of them, it is idle to say that they

had actual responsibility for the Bank's management or any better knowledge of

its affairs than the depositors.

Within the last decade at least thirty-one states which formerly had double

liability have abolished it either absolutely or upon compliance with certain

conditions. Only five states appear to have retained their double liability

provisions intact, and in one of these a proposal to abolish it is currently being

considered. See 'Stockholders' Double Liability,' Commerce Clearing House

State Banking Law Service, Vol. II.

Findings of the trial court included the following:

'61. Banco was organized in good faith.

'62. Banco was 'certainly not a sham.'

'63. Banco was 'not organized for a fraudulent purpose or to conceal secret or

sinister enterprises conducted for the benefit of the Bank.'

'64. Banco was not a mere holding company.

'65. Banco 'was formed for the purpose set out in the letter of July 19, 1929,

and for no other purpose.'

'66. Banco 'was not formed as a medium or agency through which to avoid

double liability on the stock of the Bank."

This court has considered the disregard of the corporate fiction in Donnell v.

Herring-Hall-Marvin Safe Co., 208 U.S. 267, 273, 28 S.Ct. 288, 289, 52 L.Ed.

481, and Klein v. Board of Supervisors, 282 U.S. 19, 24, 51 S.Ct. 15, 16, 75

L.Ed. 140, 73 A.L.R. 679.

In authoritative studies made prior to the origin of this controversy which

included studies of many of the cases cited by the Court's opinion we are

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unable to find a trace or suggestion of the present theory of stockholder liability

for corporate obligations created by legislation. See Douglas and Shanks,

Insulation from Liability through Subsidiary Corporations,' (1929) 39 Yale L.J.

193; Powell, Parent and Subsidiary Corporations (1931), esp. Ch. III; Wormser,

Disregard of the Corporate Fiction (1927).

anderson v. abbott, 321 u.s. 349 (1944)

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